In the ever-evolving landscape of finance and technology, the term fintech has emerged as a commonly used amalgamation of two distinct yet intertwined realms: finance and technology. As startups continue to disrupt traditional financial services with innovative solutions, understanding the interplay between the “fin” and tech elements becomes crucial, particularly when considering valuations.

The ‘Fin’ Model

Firstly, there’s “fin,” which are fintech companies on the financial services side of the industry. These are system integrators whose goal is to use other companies’ new technologies to reduce customer acquisition costs (CAC) and increase lifetime value (LTV).

“Fin” companies offer services like credit card solutions, access to more and better types of loans and subprime mortgages. However, the “fin” landscape can become overcrowded due to the lower barrier to entry, leading to stiff competition and potentially lower long-term valuations.

Prominent examples of companies leveraging the “fin” model within the fintech industry are:

• Insurtech firms and lenders like using tech to provide better ways to offer loans and insurance.
• Buy now, pay later (BNPL) companies like (Klarna and AfterPay) that have created a model that promises long-term growth and reduced CAC via network effects.
• Neobanks like (Varo and Chime) that have gained customers by using a “land grab” strategy to secure clients that traditional banks historically ignored.

The “fin” model looks for substantial long-term growth by reducing CAC, increasing LTV or both.

Despite many successes, “fin” firms (like RocketMortgage) usually don’t compete with the giant gross margins held by “tech” companies in the fintech space. Their ability to deliver better and cheaper products is limited when compared to their “tech” counterparts (such as Bloomberg Terminals). They have a more linear growth trajectory, compared to an exponential growth trajectory for successful tech firms.

The Tech Model

On the other end of the fintech spectrum are tech companies that create new technology to address entrenched problems. They aim to enhance customer experiences, solve legacy problems and generate tremendous LTV. By creating innovative technology, these firms outmaneuver competitors and justify substantial investments to fuel their growth. The result, when successful, is a business model geared toward exponential growth.

Examples of “tech” companies in fintech include:

• API-based platforms (e.g., Marqeta and Plaid) that help companies issue and process their own branded payment cards or serve as connective tissue by connecting accounts across the fintech ecosystem.
• Terminals (e.g., Bloomberg) that deliver instant data analytics and financial news to traders so they can make faster and more informed decisions.
• Decentralized finance (DeFi) companies that are pioneering a new way to help people invest on better terms and with higher potential (and risk).

These companies are in the business of selling operating systems to insurance, banking and other financial industries. They become entrenched with their customers by becoming an essential part of how they do business. They create long-term value and astronomical margins by creating new technology, leading to virtuous cycles and network effects.

While the tech model has more opportunity for exponential growth than the fin model, it comes with its own set of challenges. For one, the tech side is mostly B2B, which means their customers are going to be insurance companies, banks, lenders and other fintechs. This limits the customer pool and can lead to longer sales cycles and a harder time acquiring new customers early on. The potential is huge, but it can take longer to get there, hence the need for more capital and time needed to become profitable.

What The ‘Fin’ And ‘Tech’ Models Mean For Valuation

Despite the differences in the “fin” and “tech” business models, the primary valuation objective remains: secure strong franchise value that lasts. What differentiates these models are the means to achieve this value.

While “tech” companies typically burn more cash initially, they eventually become cash-rich due to their high LTV, thanks to the unique technology they provide. However, “fin” firms face a more limited LTV and usually have higher customer churn rates. These companies need to continue to acquire more customers and achieve growth through low CAC instead of LTV, which limits their network effect compared to “tech” side companies.

“Fin” firms are often lumped into the same category as “tech” and are incorrectly valued like SaaS companies. Instead, they should be valued more like financial services companies. This is not meant to denigrate “fin” firms but to value them more realistically. Many financial companies achieved tremendous growth by leaning into tech, but it is a different growth model than creating the tech itself.

Linear Vs. Exponential Growth

When considering the valuations of “fin” vs. “tech” within fintech, follow this simple rule: Successful “fin” side companies should expect linear growth while successful “tech” side companies should expect exponential growth.

Fin companies can steadily grow in a more competitive field by using tech as their advantage. Tech companies are creating entirely new infrastructures and technologies that other companies will base their businesses on, which means years of burning cash and unprofitability for an explosive payoff down the road. Consider API-based payment authentication networks that create API connections with thousands of financial institutions and fintech apps requires significant investment and time before profitability.

Two Paths To The Same Goal

Both business models work, but there is usually less risk on the “fin” side as the tech side makes bigger bets.

Ultimately, you are looking for the same outcome within both models: strong franchise value and long-term customers. Both models are essential to the fintech ecosystem. They’re likely to grow, and could be worthwhile to build and back for decades to come.

Whether you’re a retail or institutional investor, or even if you’re evaluating a compensation plan that includes equity in a fintech company, it’s important to know whether that company is a “fin” or a “tech” company. Consider this question carefully and ask yourself, “Is this company valued in alignment with its true business model?”

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.